Bloomberg - Conference PWC - Realizing the benefit of UCITS (Patrice Bergé Vincent)
UCITS Bloombergconference6 March 2013www.pwc.fr/asset-managementRealizing the benefit ofUCITSPatrice Bergé-Vincent
PwCAgenda1. Direct regulations of asset management2. Other regulations with impact over asset management3. The new regulation paradigmSlide 2March 2013Bloomberg conference
PwCRegulatory change timelineSlide 3March 2013Bloomberg conferenceQ22012Q32012Q32012Q32012Q32012Q32012Q42012Q42012Q42012Q3 Q1Q1 Q2 Q3 Q1 Q1 Q42014Q420142013 20152013 2013 2013 2014 2014All datesareindicativeKeyMilestoneUCITSVproposalsDodd-FrankAdviserReg.Grand-fatheringperiodofKIIDceasesPRIPslegislativeproposalsDodd-FrankVolckerRuleDetailednoticeFATCALevel2AIFMDDetailedrulesEMIRShortsellingregulationRDR EMIR AIFMD FATCA SolvencyIIFATCA MAD II MIFIDIIUCITS V* ***: all FFIs to sign an agreement with the IRS**: withholding tax of 30 % if no agreement with the IRS
Direct regulations ofasset managementUCITS IVUCITS VUCITS VIAIFMDwww.pwc.fr/asset-management
PwCUCITS IV - ToolkitIncreaseInvestorProtectionIncreaseMarketEfficiencyNotificationProcedureKey InvestorInformationFund Mergers ManCo PassportMaster-FeederUCITSIVUCITSV UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingReduceadministrativeburdenSlide 5March 2013Bloomberg conference
PwCESMA’s guideline on ETFs and other UCITS issuesFor ETFs UCITS• Issues :- No subscription/redemption- Investor information Proposed guidance :- Clear definition + disclosure (includingidentifier)- Ensuring secondary market orsubscription/redemptionOther UCITS Issues:Security lending, repo and reverse repo• Issue: additional risk Proposed guidance:- Disclosure- Diversification requirements- Reinvestment of cash collateralStrategy Indices:• Issue: eligibility criteriaProposed guidance:- Disclosure- Diversification- Valuation requirementsThe AMF has published its position on 22 February 2013 confirmingthese guidelines are to be applied in France.UCITSIVUCITSV UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingSlide 6March 2013Bloomberg conference
PwCUCITS V – TimelineSlide 7March 2013Bloomberg conferenceUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbanking20092010Jan 2011July 3, 20122012–Mid 2015 UCITSIVDirective2009/5/EC; MadofffraudandLehmanBrothersinsolvencyfocusedregulator’sattention on depositary function; Publicconsultation launchedin order to strengthenthe regulationandsupervision of UCITS depositories; Feedback statement: seek for clarification of the UCITS depositaries. CESRmappingexercisepublishedin Januaryrevealedhugedifferenceson howthevariousruleson depositaryobligationshavebeenimplementedin MemberStates; AIFMDirectivevotedby EU Parliamenton 11November 2010. Publicconsultationon theUCITSdepositaryfunctionandthe UCITSmanagers’remunerationendedon 31 January2011. Publicationof a draftdirective. LegislativeprocessandestimatedGo Live!
PwCSanctions new proposed regime under UCITS VSlide 8March 2013Bloomberg conferenceUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbanking1 2 3Qualification of thebreachProportionalityprincipleCriteriaHarmonizedsanctionsList of breaches Relevantcircumstances to betaken intoconsideration(e.g.gravityandduration of thebreach, degree ofresponsibility of theresponsibleperson,...). Order to cease; Public statement; Temporary ban; Pecuniary sanction(different levels).+ Additional publicationunless would cause adamage to the market.Breaches in relation to: Authorisation/Licensing; Shareholdingcomposition; Compliance withregulation (e.g. non–compliance withcentral admin ordelegationrequirements,...).Sanction
PwCEstablishment of whistle–blowing mechanismsSlide 9March 2013Bloomberg conferenceUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingMember States shall establish effective mechanisms to encourage thereporting of breachesInternalreportingthrougha specific channelGoverningbodyEmployeeExternalreportingLocalauthority Appropriate employee protection; Data protection concerning theperson who reports and theperson allegedlyresponsible for abreach.
PwCRemuneration Principles for UCITS Managers New: Remuneration Policy for UCITS Managers. Focus on effective risk taking and prevention of conflict of interests. Scope of application – to whom requirements should apply ? Elements of the remuneration structure. Proportionate application of sound remuneration principles. Governance issues: elaboration, review and disclosure of theremuneration policy.UCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingSlide 10March 2013Bloomberg conference
PwCDepositary functionClarification of safekeeping dutiesSlide 11March 2013Bloomberg conferenceUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbanking1 AIFMD does not contain such provision.Ownership verification and recordkeeping duties.Safekeeping = 1 custody of asset orCustody duties• Those assets that can be registered infinancialinstrument accounts opened in thebooks of the depositary;• Those assets that can be physicallydeliveredto the depositary.• Must be segregated from depositary’s ownassets;• Assets must not be available fordistribution to 1/3 party creditors1.2 asset monitoringAsset monitoring dutiesAssetsthat are not capable of custody:• Derivativecontracts;• UCI;• Cash(See detailsbelow);• Timedeposits;• Collateralfor assets lent;• Foreignexchange (spot andforward);• Financialinstruments issuedinnominative form andregisteredwith anissueror a registrar.
PwCDepositary functionOversight dutiesSlide 12March 2013Bloomberg conferenceUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbanking1. Harmonisation of duties for FCP and SICAV12. Clarified cash monitoring obligation for depositaries11 AIFMD and UCITS V are exactly similar. Control of issue, repurchase, cancellation of units; Control of the NAV calculation (new for SICAV); Control that the considerationto the fund’s transactions is remitted within theusual time limits; Investment restrictions (new for SICAV); Control that the UCITS’ income are applied correctly. Monitor the cash flows of the UCITS; Ensure subscription and monies are properly received by the UCITS; Ensure that all cash is properly booked in segregated accounts opened in the nameof the Management Company or the UCITS.
PwCDepositary functionLiability regimeSlide 13March 2013Bloomberg conferenceLiability triggers: loss of assets in custody and other losses suffered by the UCITS• Liability not affected by delegation 1;• Liability may be invoked directly or indirectly through the management company.1 Under AIFMD, it is possible to delegate liability by contract between the fund,the depository and the delegate and ifcertain conditions are met.- The depositary shall be liable for any lossunlessit can prove that the loss has arisen as aresult of an external event beyond itsreasonable control, the consequences ofwhich would have been unavoidable despite allreasonable efforts to the contrary;- Reverse burden of proof: the depositary mustprove that the loss has arisen as a result of theabove mentioned event;- The depositary must restitute ”without anyundue delay” the financial instruments ofidentical type/corresponding amount to theUCITS.- The depositary shall be liable for allother losses suffered by the UCITS or theinvestors as a result of the depositary’snegligent or intentional failure.Loss of Fund Assets Other lossesUCITSIVUCITS V UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbanking
PwCUCITS VIUCITS VI Current status EC’s consultation paper issued on 26July 2012Next steps Consultation ended on 18 October 201297 answers received – final report stillnot availableContentdescription1. Eligible assets and use of derivatives;2. Efficient portfolio management techniques;3. Over the counter (OTC) derivatives;4. Extraordinary liquidity management rules;5. Depositary passport;6. Money Market Funds (MMF);7. Long term investments;8. Addressing UCITS IV.UCITSIVUCITSV UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingSlide 14March 2013Bloomberg conference
PwCAIFMD - On the road to complianceThe Directive permeates all aspects of the asset management businessThefirmFrontOfficeOperationsMarketingAccountingandFinanceComplianceand LegalLiquidityManagementRiskManagementConflict ofInterestRemunerationDuty ofCareLicensingTransparencyDepositoriesDelegationValuation InternalControl3rd CountryProvisionsMarketing/PassportingLeverageUCITSIVUCITSV UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingSlide 15March 2013Bloomberg conference
PwCKey RequirementEffective as fromJuly 2013 for EUAIFM with EU AIFEffective fromJuly 2013 forEU AIFM withnon EU AIFEffective as from July2013 for all Non EUAIFM marketing NonEU AIF in the EUwithout a passport.Capital requirements 4 4Operating conditions 4 4Valuation 4 4Delegation 4 4Leverage 4 4Depositary 4Transparency 444Investments in nonlisted companies andissuers444Marketing Provisions 4 4 4AIFMD - On the road to complianceSelected key requirementsUCITSIVUCITSV UCITSVI AIFMD MIFID II SolvencyII CRD IV PRIPs FinancialstabilityShadowbankingSlide 16March 2013Bloomberg conference
Other regulations withimpact over assetmanagementMIFID IISolvency IICRD IVPRIPSwww.pwc.fr/asset-management
PwCEnhancement of investor protection frameworkImpact on Fund distribution – initial proposalSlide 18March 2013Bloomberg conferenceUCITSIVUCITSV UCITSVI AIFMD MIFIDII EMIR CRD IV PRIPs FinancialstabilityShadowbankingInvestmentservicesProtectionrulesPrior information toinvestorsReporting toinvestorsInducementsDiscretionaryportfoliomanagementSuitability test –No changeNo change• Periodic reporting oncomplex product PROHIBITEDIndependentadviceInform if advice isindependent &supported by abroad marketanalysis(documentation)Inform ifcontinuedassessmentofsuitabilityismade• Report onsuitabilityassessment• Periodic reporting oncomplex productPROHIBITEDRestrictedadviceInform if advice isnot independentbased on restrictedmarket analysis• Periodic reporting oncomplex productNo changeExecution,reception&ordertransmissionAppropriatenesstest– NeededforstructuredUCITS andstructuredproductsNo change• Periodic reporting oncomplex productNo change
PwCNon independentPortfolio managementMember States may prohibit inducementsIf no prohibition, has to disclose in aperiodic report all inducementsInvestment adviceMember States may prohibit inducementsIf no prohibition, has to disclose in aperiodic report all inducementsFocus on inducements ban debateWhat would be banned if European Parliament version wasto be adopted?IndependentPortfolio managementMember States require to inform clientson a sufficiently large number of investmentproductsMember States shall prohibit inducementsInvestment adviceMember States require to inform clientson a sufficiently large number of investmentproductsMember States shall prohibit inducementsUCITSIVUCITSV UCITSVI AIFMD MIFIDII EMIR CRD IV PRIPs FinancialstabilityShadowbankingSlide 19March 2013Bloomberg conference
PwCEMIR - Reduce operational risks: CCP and TRSlide 20March 2013Bloomberg conferenceUCITSIVUCITSV UCITSVI AIFMD MIFIDII EMIR CRD IV PRIPs FinancialstabilityShadowbankingOperational riskmitigationactionOTCderivative tradeExtensive use of electronic facilitieswhereOTC trades are documented and managed.OTC flowsTradeClearingInformation• Clearing of "standardized"derivatives by a CCP• Reporting requirements ofexchange traded and OTCtraded derivative contractsto trade repositories• Other derivatives still OTC• Collateralization in any case:asset managers are going tobe hungry for liquid assetswhich may be posted ascollateral• Risk managementrequirements for unclearedcontractsClientCounter-partyCCPTradeRepository
PwCEligible investments for institutional investorsUCITSIVUCITS V UCITS VI AIFMD MIFID EMIRSolvencyII/ CRDIVPRIPsFinancialstabilityShadowbankingCRD IV and Solvency II:-Institutional investors less keen toinvest in asset management;-Banks in competition with assetmanagement for (stable) savingsSlide 21March 2013Bloomberg conference
PwCPackaged Retail Investment Products (PRIPs) initiativeDefinitionManufacturer ProductRetailinvestor• Any natural or legal personwho manufactures aninvestment product(Management Companies,Insurers, Credit Institutions,Investment Firms, etc.) ;• Any natural or legal personmaking changes to the risk &reward profile and the coststructure of an existinginvestment productMust be “packaged” provide indirect exposure to assets ; and repayable amounts depend on the performancefluctuation of underlying assets or reference values.(e.g. investment funds, insurance-based investmentproducts, retail structured securities, structured termdeposits).Retail Investoraccording toMIFIDExclusionState pensions oroccupational pensionschemes are not offered onthe retail market, they arearranged through publicauthorities or employers.Therefore these types ofpensions are not within thescope of PRIPs- Regulation• Insurance products which do not offer a surrender valueor where that surrender value is not wholly or partiallyexposed, directly or indirectly to market fluctuations.• Deposits with a rate of return that is determined inrelation to an interest rate.• Certain securities in terms of Prospectus Directive another securities which do not embed a derivate.• Occupational pension schemes falling under the scope ofPension Directive (IOPR) or Solvency II• Pension products for which a financial contribution fromthe employer is required by national law and where theemployee has no choice as to the pension product provider.• Professionalinvestors• InstitutionalinvestorsBig discussions…little improvements for AM sector ?UCITSIVUCITSV UCITSVI AIFMD MIFID EMIRSolvencyII/ CRDIVPRIPs FinancialstabilityShadowbankingSlide 22March 2013Bloomberg conference
The new regulationparadigmFinancial stabilityShadow bankingwww.pwc.fr/asset-management
PwCFinancial stability• G20: never more such a financial crisis• Creation of the Financial Stability Board (FSB)- Legitimacy from the G20, less independent from political power- Still limited engagement with financial industries- FSBs brief: horizontal approach to the 3 finance sectors to combat financialinstability• Main FSB work streams affecting asset management- Worries about (systemic?) linkages between banking and asset management- Global Systemically Important Financial Institutions (G-SIFIs) identificationextended to non-bank SIFIs (asset managers and/or investment funds?)UCITSIVUCITS V UCITS VI AIFMD MIFID EMIRSolvencyII/ CRD IVPRIPsFinancialstabilityShadowbankingSlide 24March 2013Bloomberg conference
PwCEuropean Commission (FSBmember) may publishlegislative initiative onShadow Banking (inparticular on MMFs)ESMAGuidelines• Publication of 3 reports for publicconsultation.• One of the 3 reports on Policyrecommendations to addressShadow Banking Risks in SecuritiesLending and Repos, sets out 13recommendations to enhancetransparency, strengthen regulationof securities financing transactions,and improve market structure : collateral will be much moreregulated ; measures on margins andhaircuts ; use of leverage…Shadow banking : 5 work streamsUCITSIVUCITSV UCITSVI AIFMD MIFID EMIRSolvencyII/ CRDIVPRIPs FinancialstabilityShadowbankingSlide 25March 2013Bloomberg conference